A $4,000 gold price remains a possibility despite strong macro statistics

Gold prices remain steady, despite easing geopolitical tensions and inflation figures exceeding the Fed’s 2% target. The Fed’s preferred inflation index, core personal consumption expenditures

The personal consumption expenditures index (which excludes food and energy) was 2.8% in April. statistics They were released on May 31 Unemployment rate in the United States It also remained low. The reported number for April was 3.3%. It may seem that the Fed has no reason to ease its monetary policies. But despite the somewhat bad news for the gold market, gold is still trading above the $2,300 level. But more is yet to come. Citigroup (C) One ounce of gold is expected to reach Price: $3000. However, in my opinion, gold should be worth more than that, and there is still more bullish news ahead.

$4,000 in gold – summary of the previous article

In my previous article on gold, I wrote about the decline in the value of the precious metal and the possibility of its value rising further, perhaps reaching $4,000 per ounce.

She also stressed that despite high interest rates, the price of the precious metal was holding up. Historically, gold has always reacted to lower interest rates and quantitative easing (QE). She also noted that geopolitical risks and unexpected crises can be strong growth factors for gold.

As I write this article, macroeconomic statistics indicate that the US economy is very strong at the moment. From the perspective of many investors, geopolitical tensions have eased. Since the fall of 2023, the world has been paying close attention to the war that Israel is waging against Hamas. There are hopes that Israel will agree to a temporary ceasefire agreement. However, this hope may be in vain. Despite the strong macro statistics, especially the low unemployment rate, I remain bullish on gold. Therefore, my extremely bullish stance remains unchanged.

Economic data

The core personal consumption expenditures index rose 2.8% compared to the same period last year. There was no change from March, and the April number was in line with expectations. On a monthly basis, this indicator rose by 0.2%, as expected. Meanwhile, the PCE price index reached 2.7%, exactly in line with previous months.

Consumers showed that they are still spending despite rising price levels. Personal income statistics also show some resilience.

This also indicates that consumer optimism is high. At the same time, this means that consumers no longer have a lot of cash to save, which was not the case in 2020 and 2021, when Americans received a lot of government money. This was all part of coronavirus relief spending to support consumption. However, this suggests that inflation remains above the Fed’s 2% target, while personal income and spending are strong.

The US job market is also strong. The unemployment rate in April 2024 is currently 3.3%, which is roughly in line with previous statistics.

The latest unemployment statistics are also close to levels seen in 2019 before the pandemic when the labor market was particularly strong.

Overall, we can say that the economy is not slowing down, while inflation numbers are above the Fed’s target of 2%. That’s why some analysts and market experts say smaller interest rate cuts are expected this year.

What will happen if the Fed doesn’t ease?

But the main question is: What might happen to the US economy if the Federal Reserve does not ease its monetary policies quickly enough? There are different opinions on this topic. In general, higher interest rates over a long period of time threaten to trigger a recession. But some experts say the US economy can withstand higher interest rates for longer. Among them is David Kelly, chief global strategist at JPMorgan Asset Management. Since the US economy is strong, consumer spending and inflation numbers are high, and the unemployment rate is very low, higher rates for a longer period may be appropriate for the economy as long as they do not remain high for too long. Higher interest rates may cool the economy a bit and allow the Fed to reach its inflation target. So, if this scenario turns out to be true, there will be a “soft landing” for the US economy.

At the same time, it is easy to go too far raising interest rates for a longer period because tightening monetary conditions would eventually push the economy into recession. What will happen to gold in this case? Well, all asset classes except the US dollar fall in value when the market starts to panic, but then take off as the Fed eases monetary conditions and investors start buying different asset classes. This also applies to gold.

Here’s how gold behaves during recessions. The chart below shows the 100-year history of gold prices; Recession is shaded in gray areas.

Gold price history

The most obvious case of gold correcting and then rising to all-time highs was in 2008, when the price of the precious metal fell from $1,000 to below $800 and then rose to $1,800. This was due to Fed stimulus and investor panic.

Something similar may already be happening now, i.e. the next recession could spur a longer rally in gold.

But it’s not the only bullish factor for gold.

Reducing geopolitical tensions

On Friday, US President Joe Biden publicly presented Israel’s latest ceasefire proposal – one that could lead to a permanent truce and which Hamas may be willing to accept. But it seems unlikely that Israel will accept a permanent ceasefire agreement. The country’s Prime Minister Netanyahu risks losing his position if he accepts the deal due to pressure from the far-right political elite. Moreover, the war in the Middle East is not over yet. The situation seems perilous. Therefore, it seems to me that any major provocation that occurs in the region may force the major powers, most notably Israel and Iran, to take action.

Relations between Russia and the United States, as well as relations between the United States and China, have not improved recently. It remains a source of concern for many investors. Therefore, any news on this front should be carefully monitored.

Logically, any significant rise in geopolitical risks could push gold prices higher.

Money supply and gold valuations

Citigroup expects gold prices to reach $3,000 per ounce in the next 6 to 18 months. According to the bank, gold’s recent rally has been facilitated by geopolitical risks and coincides with record levels in the stock market.

Goldman Sachs (GS) raised its year-end forecast to $2,700 an ounce, thanks to Federal Reserve interest rate cuts expected later this year.

However, as I’ve mentioned in my other articles on gold, I consider $4,000 per ounce a fair price so far. The reason for this is that the money supply in the US economy has risen to record levels, despite record interest rates. The high supply of US dollars means that the real value of the dollar is very low. Obviously, the higher the money supply, the lower the US dollar. A lower dollar traditionally means higher gold prices.

The ratio of money supply to gold in the United States is very high. However, it was higher in the early 1970s and in the 2000s. These periods were preceded by explosive growth in gold prices. This can be clearly seen from the chart below.

Currently, gold is undervalued compared to the US money supply.

US money supply/gold ratio

Well, you’re probably wondering why gold is objectively worth $4,000.

The chart below, taken from the Fed’s website, shows that the money supply has risen twice as much since the pandemic, as it did after the 2008 crisis. Gold prices should also have risen by twice as much because the relationship is direct. However, this did not happen, which means that the precious metal has a lot of growth potential and should be worth close to $4,000.

Downside risks

The downside risks are clear, in my opinion.

The first and most important is that interest rates will be higher for longer, which is bad news. Recent macroeconomic statistics indicate this. However, if rates do not fall over time, it will lead to a recession, which will eventually cause gold to rise broadly.

Second, geopolitical risks may recede. The war between Israel and Hamas may end, and relations between Israel and Iran may improve. Tensions between the United States and Russia and the US-China conflict over Taiwan may not escalate. In this case, safe havens like gold may not be in high demand. But in my opinion, none of these conflicts are likely to escalate this year.

Conclusion

Although recent macroeconomic statistics suggest that there will be fewer interest rate cuts this year, gold remains undervalued despite the recent rally. It does not look like the tensions in the Middle East will end anytime soon as the conflict between Israel, Hamas and Iran appears to be a long one. Thanks to the extremely high money supply, gold should be worth twice what it currently is.